India's FDI Puzzle

Rapidly rising outward foreign investment by India Inc raises questions about its reluctance to invest more in domestic projects

- A. K. Bhattacharya

Why did India's net foreign direct investment (FDI) inflows plunge by 96 per cent last financial year? They were estimated at $0.35 billion in 2024-25, compared to $10.13 billion in the previous year. That was not just a record drop in one year, but also the lowest level of net FDI inflows into the country in at least the last two decades.

A quick analysis of the data reveals that there were two factors responsible for this sharp decline: A 16 per cent rise in repatriation and disinvestment by foreign investors in existing companies to $51.5 billion, and a 75 per cent jump in outward FDI by Indian companies to $29 billion. Note that gross FDI inflows at $81 billion during 2024-25 did show a reasonable rise of 14 per cent over those in the previous year. But the rapid rise in both repatriation and outward FDI by Indian companies neutralised the gains from gross FDI.

Importantly, there was a remarkable similarity between the sources of India's inward FDI and the destinations of its outward FDI. Singapore, Mauritius, the United Arab Emirates, the Netherlands, and the United States accounted for over 60 per cent of India's total inward FDI flows. And the same five countries also accounted for more than 50 per cent of India's total outward FDI flows in 2024-25.

However, the similarity in the sectors benefitting from FDI inflows and outflows was not that stark. Gross inward FDI was concentrated in manufacturing, financial services, energy, including electricity, and communication services, with these sectors accounting for 60 per cent of such inflows. In contrast, over 90 per cent of the total outward FDI was destined for financial services including banking and insurance, manufacturing, wholesale as well as retail trade, restaurants and hotels. No data on the sectoral or destination-wise breakdown of repatriation was immediately available.